Govt in talks to set up chip fabrication units

In 2011, the cabinet created a panel of experts, including Sam Pitroda (pictured), adviser to the Prime Minister, and V. Krishnamurthy, chairman of the National Manufacturing Competitiveness Council, to evaluate the proposals. Photo: Ramesh Pathania/Mint

New Delhi: After India missed the bus on semiconductor chip manufacturing and has been forced to try and catch up, the country is trying to make sure it doesn’t lose a similar opportunity with so-called large area electronics.

These are non-silicon chips that can be printed on flexible materials as diverse as plastic, paper, textiles or even metal foil, and can be up to a few metres in size.

Low on processing capability and power consumption, the chips can be used in television displays and solar cells or be deployed in innovations such as packaging of medicines to check fake drugs, wearable and lightweight electronics on textiles as part of a soldier’s gear, airport baggage handling, labelling of books in libraries or exam answer scripts.

India has thus far been unsuccessful in getting chip manufacturers to set up factories in the country, largely because its infrastructure is inadequate. The government considers the establishment of such facilities as being integral to the development of an electronics industry and announced incentives in this regard in the budget for the next fiscal.

The department of electronics and information technology is considering a proposal to set up research and development centres in the country, which will undertake targeted product development in the area of large area electronics. These centres, which will be supported by the government, will have joint ownership by industry and academia.

Ajay Kumar, joint secretary in the department, said he expects a new industry altogether to be “spawned” through this measure.

“The centres of excellence will involve very targeted research and product development and will be based on a collaborative model between industry and academia, which may incubate several new companies as well,” he said.

Kumar said even though these were the initial stages for the proposal, the country doesn’t want to “miss the bus”, as had happened in the case of semiconductor chip making.

The Indian Institute of Technology (IIT), Kanpur, has prepared a concept paper that is being considered by the department, said Kumar, after which a detailed project report complete with the financials will be prepared and the cabinet’s final approval sought.

He added that the industry is currently in its infancy but that this was the right time to seize the opportunity if India was to become globally competitive in electronics manufacturing.

The concept paper, a copy of which is with Mint, said that according to global industry sources, the flexible electronics market was estimated at $1.8 billion in 2011 and is projected to reach $19 billion in 2018. Much of the activity today is concentrated in North America, Germany, Finland, Denmark, South Korea, Taiwan and Japan, with several significant strategic alliances and centres of excellence that have recently emerged.

The presence of academia and firms across the value chain will ensure “everyone can work in a shared ecosystem as the equipment and facilities are very expensive, and developed products will reach markets faster due to this convergence”, said Deepak Gupta, professor, materials science and engineering, IIT-Kanpur.

Meanwhile, almost two years after it first invited proposals for setting up semiconductor chip manufacturing, the empowered panel that was considering incentives has submitted its report to the department, which is expected to send it to the cabinet by the end of this month. According to several people familiar with the matter, the government is in talks with two consortiums to set up chip fabrication units in the country.

Spokespersons for HSMC, IBM and STMicroelectronics declined to comment. Jaypee Group did not respond to an email query. In 2011, the cabinet created a panel of experts, including Sam Pitroda, adviser to the Prime Minister, and V. Krishnamurthy, chairman of the National Manufacturing Competitiveness Council, to evaluate the proposals.

Previous efforts by the government to attract global chip-makers to invest in India have floundered. For instance, some experts say manufacturing even a single chip requires hundreds of gallons of pure water, something that’s hard to find in India in the required quantities.

The efforts are being revived at a time when the government has sought to kick-start domestic manufacturing of electronics under the National Electronics Policy 2011. The incentives for chip manufactures are part of this effort, as is a 30% reservation in all government contracts for products made in India.

In June 2011, India invited proposals from firms wishing to set up semiconductor fabrication units, or fabs, and promised to partially support the units through tax incentives or other subsidies because these are capital-intensive projects entailing investment of at least $4-5 billion.

And because chip-making creates its own upstream and downstream ecosystem, the thinking in New Delhi is that this could kick-start hardware manufacturing in India.

“We are expecting chip fabs to act like anchors for the entire hardware ecosystem. They would not only help the design industry but also help set up the entire downstream industry in terms of components manufacturers, etc.,” said a government official on condition of anonymity.

In response to the 2011 offer, the government received almost 30 letters expressing interest, from companies such as Infineon Technologies AG, STMicroelectronics, Russia’s Sitronics, Globalfoundries Inc. and a consortium comprising Jaypee Associates, IBM and Israeli firm TowerJazz.

The government’s latest effort to attract investments in a fab unit comes after a series of failed attempts. In 2007, an effort to woo Intel Corp. to set up a facility in India failed and the firm set up a unit in China. In the same year, an ambitious semiconductor policy ended up catalysing investments for solar fab units instead of the desired and more complex semiconductor wafer fab units. The policy was also a victim of the global economic crisis.

Pradip K. Dutta, a former chairman of the India Semiconductor Association (ISA), said that in 2007, when the government had come forward to invite semiconductor manufacturing investment under a new policy, there wasn’t “much deep thinking that went to it. It was more of a jingoistic plan where the government offered a basket of goodies and wanted to see who was interested in taking it.”

Citing “supply chain” and “strategic defence” issues with being dependent on China and Taiwan for chips, Dutta said the current plan is more “systematic” and that an effort of this nature by the government could send out a positive signal to potential investors.

Not everyone is convinced. ISA and Frost and Sullivan said in a January report that despite a huge domestic market, the Indian electronics systems design and manufacturing industry has not been able to realize its potential for a long time and had missed the opportunity to emerge as a world leader even as smaller economies have gained. “With so much time lost, an urgent action plan is required to effect a paradigm shift. Stakeholders—the industry and the government—have to exhibit the highest level of commitment to bring about change immediately,” the report said.

The government announced exemption from customs duty for equipment required for setting up semiconductor (electronic chips) plants in the budget for 2013-14.

“The electronics policy 2012 is intended to promote manufacture of electronic goods in India. We recognize the pivotal role of semiconductor wafer fabs in the ecosystem of manufacture of electronics. I propose to provide appropriate incentives to semiconductor wafer manufacturing facility including zero custom duty for plant and machinery,” finance minister P. Chidambaram said in his budget speech.

He also said a firm investing Rs.100 crore or more in plant and machinery across sectors between 1 April 2013 and 31 March 2015 will be entitled to deduct an investment allowance of 15% of the investment.